Stocks Rebound, But Pensions Haven't
Source: USA Today
Author: Matt Krantz
Stocks improved last year, which you might think would help solve Corporate America's pension problem. The trouble is, it has barely made a dent.
A vast majority of pension plans still face massive cash shortfalls, according to statistics to be released Sunday by Standard & Poor's.
While that may worry retirees, it's primarily a concern for investors, because if something doesn't change, companies will need to divert cash into their pension plans rather than do such shareholder-friendly things as buying back stock or increasing dividends.
are invested partially in the stock market. The market, measured by the S&P 500, gained 10.9% and 28.7% in 2004 and 2003, respectively, with dividends reinvested. But even with those gains, pension plans are still:
- Deep in the red. Companies in the Standard & Poor's 500 are still short $164.3 billion in covering their expected payouts to pensioners, S&P says. That's only a slight improvement from the $164.8 billion deficit of 2003.
- Broadly underfunded. Of the 369 S&P 500 companies that offer pensions, 311 do not have enough money in their pensions to cover their obligations.
- Disproportional shortfalls. There's a large spread between some companies that are slightly underfunded and those with massive shortfalls.
For instance: Ford Motor, ExxonMobil, General Motors, Boeing and IBM face $11.7 billion, $10.1 billion, $8.6 billion, $6.7 billion and $5.8 billion deficits, respectively. Meanwhile, Ambac Financial, AmSouth, Coach and Sealed Air are each $3 million or less underfunded.
Silverblatt says the shortages aren't so much of a concern for employees and retirees, in most cases. After all, the industrial companies alone in the S&P 500 are sitting on $634 billion in cash. That's easily enough to cover the $164.3 billion shortfall they face. "They could make up the underfunding right now by just writing out a check," he says.
But investors may be assuming that cash was coming to them in the form of dividends, says David Zion, accounting analyst at Credit Suisse. What's more, some plans for pension reform would force companies to contribute $41 billion to their pension plans for 2005, which is 28% more than companies were expecting, he says.
Even so, it's not a crisis that will blow up overnight, says Michael Schlachter, a managing director of Wilshire Associates.
He says most companies have at least a decade or more to figure out the solution. "Companies have time to shore this up," he says.
